Short-Lived Euphoria in Europe

Bailout funds would have to come from a combination of creative forms of monetary inflation and clever financial and accounting engineering, much of it using more of the leveraged gimmicks that already have made both Europe’s and the United States’ financial systems so stressed and vulnerable.

Second, how realistic is it to expect all EU member states to finally start to abide by the terms of the Maastricht Treaty that they signed—the one in which they solemnly promised to keep sovereign debt and deficits far below current levels? How many of the electorates in these democracies will support government “austerity plans”—a significant reduction in the government handouts to which they have grown so addicted?

The modern welfare state is broke. As Herman Van Rompuy, the president of the European Council, has stated, “We can't finance our social model anymore.” Government spending will have to be trimmed whether Europeans want it or not, but don’t expect European voters to admit the inescapable economic facts and vote for belt-tightening.

It is because voters don’t want to surrender government benefits that Papandreou’s announcement of a referendum in Greece has caused consternation and displeasure among the EU’s political elite. The irony here is rich: How dare the leader of a democracy leave such an important decision to the people!

Personally, I think Papandreou did what he had to do. If he were to try to cram austerity down the throat of his compatriots, he would appear to be siding with foreign elites against his own people. The present simmering rebellion in Greece would increase, giving way to social chaos and the fall of Papandreou’s government, thereby triggering the sovereign default that Europe’s leaders understandably want to avoid.

If Greeks vote against the terms of the bailout, Greece will default. If they approve the plan, then a Greek sovereign default may be delayed (not eliminated—Greece is too far gone to rescue). Even if we remove Greece from the equation entirely, events in Spain, Italy, Portugal or Belgium might trigger the dreaded chain reaction of bank and sovereign bankruptcies.

Decades of government intervention into economic activity have produced economic distortions, sluggish growth, an unsupportable debt burden, and a rotten financial structure ready to collapse of its own dead weight. In spite of that record, most Europeans want more government. That’s their choice. Like it or not, sooner or later, we reap what we sow.